Everyone talks about cryptocurrency but very few people have a good understanding of what it really is and fewer still know the different ways to invest in cryptocurrencies. In today’s article, I will be taking you through the different options available to you if you intend to invest in cryptocurrencies.
There are at least 5 different ways to invest in cryptocurrencies. Each way carries different levels of risks and a few requires a lot of work on your part. To make it easy to compare them in one view, I have created a tabular comparison below.
Fixed Income on Stablecoins
Stablecoins are cryptocurrencies whose values are pegged to fiat currency, usually USD. Most maintain a 1:1 value to USD. Popular stablecoins are USDT, USDC and BUSD. They provide a much less risky way of participating in the cryptoverse, and for those looking to earn a fixed income on their stablecoins, there are many platforms that give weekly or monthly interest payments on stablecoins saved with them. Most of these platforms are DeFi (decentralized finance) platforms, and some of the very popular ones are BlockFi, Celsius, Nexo, Youhodler and Binance (which is also an exchange).
The risk in fixing your stablecoins for interest earning is largely one of platform risk, more significant than the risk of the stablecoin becoming worthless is the risk that the platform you fixed the stablecoin with gets hacked or falls into a difficulty that makes them close shop without returning your capital and interests earned. So you want to limit yourself to the biggest and most reputable ones before comparing yields on savings.
Besides that risk, which can be managed if you pick a very reputable platform, there’s not much hassle involved in setting up an account and saving to earn good interests on your stablecoins. It is one of the low risk ways to invest in cryptocurrencies.
Buy and Hodl
No spelling error there, it’s actually hodl and not hold. You buy cryptocurrencies you believe will grow in value and be in existence for a long time, then you hodl.You don’t sell it and you don’t trade it. You simply store away your holdings as a land banker would the lands he feels will be worth 10 times more in a few years.
This is not as safe as dealing with stablecoins that are pegged to USD but it can be a very rewarding way to participate in the well agreed on growth projections for the cryptocurrency space. It is, however, prudent to stick to large project coins like Bitcoin, Ethereum, Binance coin, Solana, Cardano, etc.They are less susceptible to hacks and issues that can wipe out the coin value compared to coins of new and small projects.
Many cryptocurrencies run a mechanism called proof of stake (PoS) where those who process the transactions for the cryptocurrency’s blockchain are rewarded according to their stakes in a dedicated pool of coins. Imagine the pool as a collection of entry fees to participate in processing transactions and getting rewarded with free coins for every successfully processed block of transactions. Now, there are some people and organizations who want to pay a very large entry fee so that they get more chances of being picked to process transactions and earn more frequent rewards (coins). These people are willing to borrow your crypto and split the rewards they earn with you. And that’s the easy way to explain crypto staking. You lend your coins to be staked and you earn more coins over time. Not all coins can be staked, only the ones whose blockchain operates a PoS.
It is more rewarding than just holding on to your coins but you run an additional risk of the borrowing entity mismanaging the coins and becoming unable to give you back your coins.
Just as people trade stocks, trade forex, so also can cryptocurrencies be traded. And what is very exciting about the cryptocurrencies market is that it runs 24 hours a day and every day of the week. No holiday and no weekend. That makes it a very active market and one that can be very profitably traded for those with the skills and time to put into it.
For most regular people, trading is a very high risk activity and one that leads to big losses. There are trading bots that are often sold as always profitable and a life saver for the newbie traders. My experience has been to the contrary, these bots are often black boxes that make you money and lose you those money and you won’t know why. Only the sellers and their promoters seem to be making consistent money from them.
NFT stands for Non-Fungible Token and it is what is powering the metaverse, an alternate world in the digital space. Today, there is another earth with the same continents and countries, and you can buy a piece of land or building in that alternate earth. When you do that, you have actually purchased an NFT. You will use cryptocurrencies to make the purchase and when you sell, you get cryptocurrencies back.
It is already a real thing for gamers. They are constantly buying in-game merchandise and nowadays, those merchandise are NFTs. You can own merchandise that you can lend to gamers to use and you get paid for it. In a football game, you could be part of the owners of a stadium and get paid every time a football match is played in that stadium.
And if you are a creator – musician, artist, movie star, designer – you can create NFT versions of your works and sell them online. You will be amazed by the results as the interest for all NFTs are very high at the moment.
And those are the different ways to invest in cryptocurrencies.